More Bubbles?

“It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.” – Lou Jiwei, Chairman of China’s sovereign wealth fund

Translation: Oh no, not again.

I thought we were going to deal with the damage from the housing bubble, which came about because we didn’t deal with the dotcom bubble properly. Now I read this and I guess we need to gear up for the commodity bubble that will be coming up soon. Eventually, we’re going to run out of bubbles or the ability to create bubbles and the whole thing comes crashing down that much harder.

Get ready for more Minsky Moments in the future. And if you don’t know what one is, fire up the Wikipedia and add something to this discussion when you’re familiar with the concept.

28 thoughts on “More Bubbles?

  1. Emily S.

    ok, so let me see if I get this right, a Minsky Moment is kind of like when a “bubble” “pops”? and it is a cycle that the American economy has gone through now several times? So is the only way to stop repeating this either reforming or restricting at least partially how our economy works, or a higher standered in morals/responsibility and education about about economics. It seems like it is people making the same stupid mistakes they did last time.
    http://www.moneyweek.com/news-and-charts/economics/have-we-reached-a-minsky-moment.aspx

  2. Alyssa Anderson

    Economic bubbles will probably be around as long as people continue to both act irrationally and to always enthusiastically jump on the nearest bandwagon coming around. But despite their inevitability, it doesn’t exactly make much sense that those in charge would intentionally create bubbles. After reading up on some up the effects of economic bubbles, it instead seems like something that the nation would only want to prevent. According to Wickipedia the end results of bubbles can include depression, deflation and lower spending. None of which are really considered all that great for the economy in general. Shouldn’t America be working to prevent outcomes such as these, especially at a time when the economy is already suffering? The idea of more bubble being deliberately created just comes off as irresponsible. Especially at a time when everyone is witnessing the aftermath of the housing bubble.

    On the other hand, here are some thoughts by a guy in favour of economic bubbles. (Although it’s apparently been a few years since it was written)
    http://www.washingtonpost.com/wp-dyn/content/discussion/2007/05/08/DI2007050801361.html

    http://en.wikipedia.org/wiki/Economic_bubble

  3. Hugo Espiritu

    Well Alyssa I just wanted to point out that the people who start the bubbles are the ones who profit the most from it. The aftermath of depression, deflation, and lower spending doesn’t really hurt them because they have all the money which means that they aren’t “depressed”; deflation would only make them richer, and they could care less about lower spending.

  4. David Liou

    When people create bubbles they aren’t being irrational they are just blinded by their greed. It makes perfect sense that bubbles are intentionally being created because the American economy has an “ego” which can’t stand China being the top economy. But since China has a communist economy, everything that is taken for granted in America is screwed up. When the bubbles pop, the government in China is “loses” but it controls literally everything so they don’t actually lose and enter a recession/depression. However, the “Free” Market economy of the US can’t survive unscathed when a bubble pops.

    The people who start the bubbles may also be the ones who end up losing the most since they have the most assets. People are greedy, and they don’t stop when they’re “full”. So when the stocks start to fall they may save some of their assets but never all.

  5. deanwebb Post author

    Thanks for the article links… and it’s shocking to see for-reals economists actually proposing to initiate more bubbles in succession. Now the thought is not that a particular asset will always increase in value, but that a bubble can always be manipulated to fend off collapses.

    But if people realize a bubble is deliberately being created, then it seems that eventually a bubble will fail to form when needed and then the whole thing falls totally apart.

  6. Hugo Espiritu

    That’s a good point Mr. Webb. You can’t have an economic bubble without any suckers playing along.

  7. Hugo Espiritu

    Then again, I doubt that someone who is planning a bubble will take the risk of not ensuring that it will take off. I bet there are creative ways of creating bubbles. All it takes to create bubbles is hype.

  8. Raphael Yohannes

    “A Minsky moment is the point in a credit cycle or business cycle when investors have cash flow problems due to spiraling debt they have incurred in order to finance speculative investments. At this point, a major selloff begins due to the fact that no counterparty can be found to bid at the high asking prices previously quoted, leading to a sudden and precipitous collapse in market clearing asset prices and a sharp drop in market liquidity.[1]

    The term was coined by Paul McCulley of PIMCO in 1998, to describe the 1998 Russian financial crisis,[2] and was named after economist Hyman Minsky. The Minsky moment comes after a long period of prosperity and increasing values of investments, which has encouraged increasing amounts of speculation using borrowed money.

    Some, such as Paul McCulley, have dated the start of the financial crisis of 2007–2009 to a Minsky Moment, and called the following crisis a “Reverse Minsky Journey”; McCulley dates the moment to August 2007,[3] while others date the start to some months earlier or later, such as the June 2007 failure of two Bear Stearns funds.

    The concept has some parallels with Austrian Business Cycle Theory, although Hyman Minsky himself was known as a “radical” Keynesian, and is identified as a post-Keynesian.”

    http://en.wikipedia.org/wiki/Minsky_moment

  9. David Liou

    If we keep falling back on the idea that we can create another bubble we will not have motivation to find a solution to the economic crisis until it is too late.

  10. Hugo Espiritu

    It does sound dumb to make more bubbles to prevent the complete unwinding of previous bubbles. I think it would be better to face it head on rather than have many lesser crises on top of the the big disaster. Just make sure everybody gets out of debt.

  11. David Liou

    If we want to face it head on, now is the time. As more bubbles are created and popped, the ‘bad’ of the economic recession afterwards will become increasingly worse. Having many lesser crises goes more along with the economic cycle though. How bad would it be if we let everything go now?

  12. Hugo Espiritu

    You’re right David, The accumulated bubble will only get worse might as well get it done with before the pending consequence gets worse.

  13. Hugo Espiritu

    I just want to know whose idea it was to start the first bubble to get us in this mess and what that person’s rationale was

  14. Hugo Espiritu

    I just want to know whose idea it was to start the first bubble to get us in this mess and what that person’s rationale was?

  15. David Liou

    It would hard to pinpoint the exact person who started bubbles since they were around in the 17th century, ex. Tulipmania, when the price of tulips were driven so high that some could cost as much as a house.

  16. Hugo Espiritu

    Really, where did you get your info? That seems a little too outrageous

  17. Hugo Espiritu

    Never mind, I looked it up on Wikipedia and you’re right. Certain people would give acres of land for just one tulip. People are very stupid.

  18. Nagih Youssouf

    So let me get this straight, you could buy a house with a tulip?

  19. Nagih Youssouf

    Did the dot-com bubble mainly affect the technology industries?

  20. Hugo Espiritu

    That is what basically happened. Technology industries’ value , especially internet companies, shot through the roof because of the speculation.

  21. Hugo Espiritu

    And about the tulip comment, yeah people would also give up land that had even prettier flowers, it was just the hype of the tulip that made people go crazy.

  22. chanel wan

    I have an idea but it is some what out there… What if we legalized weed and that would create a new bubble? Wouldn’t that help the country if we would set a tax on it that is higher than the tax on alcohol and cigarettes due to the mass amount of people who do use weed illegally now?

  23. David Liou

    That’s not that great of an idea, because more people will use it and then health care will cost the nation billions perhaps trillions of dollars more in the coming years. And bubbles of any kind aren’t great for the economy.

  24. chanel wan

    oh ok, i know its not about legalizing drugs, but wouldn’t the drug issue be a bubble in our economy?

    and would retail be considered a bubble? like the increase of buying retail goods and then all of a sudden decreasing? or would that just effect supply and demand?

  25. deanwebb Post author

    A bubble is when the economy assumes the price of something will, just this once, always increase.

    http://www.youtube.com/watch?v=QjN8q5rwLoo for a Swiftian look at bubbles.

    “We have sold the house and the pig and we intend to put all our fortune into this venture!” <- that's the mindset of a bubble. Irrational speculation, through and through.

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